The SECURE ACT, otherwise known as the Setting Every Community Up for Retirement Enhancement Act, was signed in to law on Friday, December 20, 2019. I have spent quite a bit of time studying the mechanics of this tax reform since then and I have narrowed it down to several key takeaways.
Given that the SECURE ACT may have an immediate impact on your investment strategy, I have highlighted four major changes that have been instituted by the new tax law.
1). The required minimum distributions (RMD) age is now set at 72. This is an increase from 70 1/2 years of age. Take note that this change only applies to individuals who attain the age of 70 1/2 after December 31, 2019.
What this means is that you will be required to start withdrawing funds from your 401(k)s, IRAs, 403(b)s, and 457s by the age of 72.
2). The age restriction for making IRA contributions beyond the age of 70.5 has been lifted provided that you have earned income. In other words, as a wage earner, you can continue to contribute to your IRA even while working into your 70s and beyond.
3). Inherited IRA Restrictions; Prior to the implementation of the SECURE ACT, all designated beneficiaries of an account owner's IRA and defined contribution plans such as the 401(k), to include spouses and non-spouses, were allowed to stretch out the minimum distributions over his or her lifetime. However, the new tax law changes this rule significantly.
“Specifically, The SECURE Act eliminates the current rules that allow non-spouse IRA beneficiaries to “stretch” required minimum distributions (RMDs) from an inherited account over their own lifetime (and potentially allow the funds to grow tax-free for decades). Instead, all funds from an inherited IRA generally must now be distributed to non-spouse beneficiaries within 10 years of the IRA owner’s death. (The rule applies to inherited funds in a 401(k) account or other defined-contribution plans, too.)”
“There are some exceptions to the general rule, though. Distributions over the life or life expectancy of a non-spouse beneficiary are allowed if the beneficiary is a minor, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. For minors, the exception only applies until the child reaches the age of majority. At that point, the 10-year rule kicks in.” (Olenchin, 2019)
4). Penalty-Free Childbirth or Adoption Early Withdrawals; As a means to assist parents with birthing or adoption costs, the new law will allow withdrawals from your 401(k)s and IRAs up to $5,000 without incurring the standard 10% early withdrawal fee. The catch is as follows...
The withdrawals must be made within one year after the birth or the adoption of the child provided that the child is under the age of 18 and is not mentally or physically incapable of supporting themselves.
The 10% penalty will still apply if one of the parents are adopting the child of their spouse.
I highly encourage you to conduct an in-depth review with your trusted advisor of your current holdings to define how this new law (SECURE ACT) will impact you going forward and then plan accordingly.
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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.
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